06 December 2011

OECD on Income Inequality

OECD has a new report out on income inequality.  The report concludes:
Today in advanced economies, the average income of the richest 10% of the population is about nine times that of the poorest 10%. Even in traditionally egalitarian countries – such as Germany, Denmark and Sweden – the income gap between rich and poor is expanding – from 5 to 1 in the 1980s to 6 to 1 today. It’s 10 to 1 in Italy, Japan, Korea and the United Kingdom, rising to 14 to 1 in Israel, Turkey and the United States and reaching more than 25 to 1 in Mexico and Chile.
Why should we care about income inequality?
Rising income inequality creates economic, social and political challenges. It can jeopardise social mobility: intergenerational earnings mobility is low in countries with high inequality such as Italy, the United Kingdom and the United States, and higher in the Nordic countries, where income is distributed more evenly. The resulting inequality of opportunities will affect economic performance as a whole. Inequality can also fuel protectionist sentiments. People will no longer support open trade and free markets if they feel that they are losing out while a small group of winners is getting richer and richer.
An interesting finding from the analysis is that one reason that income inequality has increased has been a diversification of the labor force, with globalization playing a minor role:
[R]egulatory reforms and institutional changes increased employment opportunities but also contributed to greater wage inequality. These reforms were carried out to strengthen competition in the markets for goods and services and to make labour markets more adaptable. The good news is that more people, and in particular many low-paid workers, were brought into employment. But the logical consequence of more low-paid people in work is a widening distribution of wages.
What does OECD recommend?  Better jobs.
The most promising way of tackling inequality is through boosting employment. Fostering more and better jobs, enabling people to escape poverty and offering real career prospects, is the most important challenge for policy makers to address.
Boosting employment may help lift the bottom, but it does not address issues at the top. The OECD tiptoes around the issue of taxes and the super wealthy.